Offsetting claims and Statutory Demands

In Qube Logistics (Vic) Pty Ltd v United Equipment Pty Ltd [2015] WASC 70 Master Sanderson has held that a clause in a contract that provided:

The [debtor’s] obligations to make payments and otherwise perform its obligations under this agreement will continue regardless of any defect in, or lack of performance of, the equipment [supplied by the creditor to the debtor] and the [debtor] has no right to claim any set-off or withhold any payments. ((See [8] of the judgment.))

did not preclude the debtor from asserting (for the purposes of s 459H(5) Corporations Act, on an application to set aside a statutory demand) that a defect in equipment was a “cross-demand” and thus an “offsetting claim” as defined in the section.

The Facts

United had leased certain equipment to Qube. Qube alleged defects in the equipment and ceased paying rent (notwithstanding the above provision). United issued a statutory demand for unpaid rent. Qube successfully applied to set the demand aside.

The Decision

The learned Master said:

If I was determining this application at first instance and without the benefit of authority I would have found the plaintiff did not have an off-setting claim because of the contractual provisions… However, mindful of the national nature of the corporations regime and allowing for the fact Bakota Holdings ((Bakota Holdings Pty Ltd v Bank of Western Australia Ltd [2011] NSWSC 1277.)) has stood for just over three years it would seem to me I should follow that decision. ((At [12].))

In Bakota Holdings, Barrett J had said:

…the inclusion of ‘cross-demand’ in the definition of ‘offsetting claim’ shows that the concept extends beyond claims that can be deployed by way of set-off or counterclaim in debt recovery proceedings. ‘Cross-demand’ is a wide term apt to include a claim that a defendant can assert as an answer to the claim made against him, a cross-action of counterclaim maintainable in the proceedings in which the claim against him is advanced and a claim that can only be pursued in separate proceedings… ((Bakota Holdings at [24].))

and

Adoption of the wide term ‘cross-demand’ in the particular statutory context is understandable. The purpose of the statutory demand process is to test whether a company’s failure to pay a particular debt should be regarded as a reliable indicator of likely inability to pay debts generally … The … indicator is … [not] safe where the company shows that it has an equal or greater claim against the demanding creditor, whether or not the equal or greater claim could be litigated in proceedings in which the demanding creditor sought to recover the demanded debt. ((Bakota Holdings at [25].))

The learned Master recited the above passages ((At [10].)), together with passages from earlier judgments that had been to the opposite effect of Bakota Holdings.

Practitioners in Western Australia now have some confidence that Bakota Holdings will be applied here. No doubt due to the national nature of the Corporations Act, the decision further cements Bakota Holdings.

In summary the term “cross-demand” is not to be narrowly construed, and nor is it to be interpreted having regard to notions of what can (and cannot) be pleaded in a debt recovery matter.